CIL rejects subsidiaries proposed prices to buy back shares

Kolkata, March 10 -- The board of Coal India Ltd (CIL) has rejected the prices at which three of its wholly owned subsidiaries had proposed to buy back their own shares, impairing the Union government's ability to take cash out of the coffers of the state-owned miner and its units.
Northern Coalfields Ltd, Mahanadi Coalfields Ltd and South Eastern Coalfields Ltd on Friday announced the revision of price at which they would buy back shares from their parent, CIL.
Though they have lowered their own valuations, they have kept the proposed payout unchanged. Four subsidiaries together had earlier proposed to release Rs5,063.25 crore from their reserves. The cash being taken out will help CIL pay an interim dividend of Rs11,640 crore, which was announced earlier this week.
The revised prices are based on the book value per share of the subsidiaries, whereas previously, in February, they had valued themselves on the basis of their potential profitability and the market price if they were listed, said a key CIL official, asking not to be named.
It was found that under tax laws, valuation of privately held companies should ideally be determined by the more conservative book value which is derived on the basis of acquisition cost of assets, added this official.
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Because of the lowered valuations, these subsidiaries will be buying back a much bigger share of their equity capital. Northern Coalfields will be buying back 23.14% of its equity capital as against 4.29% proposed in February. Similarly, Mahanadi Coalfields' equity capital will contract by 24.23% as against 2.97% proposed earlier, and South Eastern Coalfields will be buying back 16.93% of its outstanding shares compared with 4.18% proposed earlier.
This implies these subsidiaries will not be able to release more cash by way of buyback within the foreseeable future, according to an investment banker, who, too, asked not to be named.
Under Indian securities laws, companies are not allowed to buy back more than 25% of their equity capital within a year.
For the past few years, CIL's payout to the Union government in the form of dividend and buyback of shares has exceeded its post-tax profits, said former chairman of the miner, Partha S. Bhattacharyya. This isn't a "healthy trend" in view of the investments that CIL has to make to achieve the production targets set for it by the Union government, he added.
Going at this rate, CIL's cash surplus, which was at Rs38,312 crore at the end of March 2016, may soon get drained and it may have to borrow to meet its production targets. "This may not pass the test of financial prudence," Bhattacharyya said.